In Simple Words
Imagine receiving a small discount on your monthly rent versus being permitted to use your security deposit to buy a delivery van for your bakery. The rent discount saves a little cash, but the delivery van permanently doubles your daily sales volume.
Women borrowing through VFS in Kolkata
- Repayment starts after two weeks
- Reference business capital
- Repayment starts after two months
- About Rs.23,600 more business capital
Nearly three-year trial result; capped, unadjusted capital estimate. Returns and income-versus-portfolio mechanisms require additional assumptions. Default also rose.
See source →Research question
Lenders must distinguish whether the long-run benefits of a grace period stem from lower debt service present value (an income effect) or from enabling high-return illiquid asset purchases (a portfolio effect).
Participants
N = 845 microfinance borrowers in urban Kolkata, India (simulated via numerical cash-flow models calibrated to experimental data).
Study Design
Counterfactual financial simulation comparing endline business capital differentials generated by net present value interest savings against asset return differentials over 36 months.
Results
The net present value income effect accounts for only Rs 10,000 (roughly 42%) of the observed Rs 23,600 long-run capital stock differential between grace period and regular clients, proving that enabling illiquid investment choice (the portfolio effect) drives the majority of economic gains.
Takeaway
Structure microcredit terms specifically to facilitate high-return asset purchases rather than relying solely on interest rate cuts or fee waivers.